The Problem With Minimum Wage Laws

Let's say you want to be humanitarian and help poor workers. So you enact a minimum wage law or your raise the current minimum. If we use a competitive labor market model, fewer workers will be hired. So you have the problem of helping some workers at the expense of others. And then there is the problem of those who never get hired for their first job and can never move up the income ladder. And then there are businesses that are never started due to higher costs and that means fewer workers hired.

But what if we assume a monopsony model, where only one firm hires labor. In that case, a minimum wage can increase the number of workers hired, if it is not raised too high (above a certain level, the number of workers hired will fall).

But if the affected firms can stay in business with this increased cost of labor, it means that before the minimum wage was imposed they were making above normal profit. Because if they had been making just normal or zero profit, the increased costs would put them below normal profit and they will not stay in business in the long-run, leading to job losses.

Now if they were making above normal profit in the first place, what prevented other firms from entering and driving profit back down to normal? There would have to be barriers to entry. But it seems like the barriers to entry are not that high in industries affected by the minimum wage like retail and restaurants.

Also, if new firms entered these industries, the demand for labor would increase, thus raising the wage rates. This eliminates the need for a minimum wage law.

But in any case, minimum wage advocates have to show that the industries affected have significant barriers to entry. I am not aware that this case has ever been made.

But what if there is monopsony power (or temporary monopsonies as Card and Krueger suggest)? How does the government know the degree of monopsony power each firm has? A single minimum wage imposed on all firms might be sub-optimal. It might be too high for some firms and too low for others (I'm assuming that the wage that would exist under competition would be optimal). As Milton Friedman said, you replace market failure with government failure because government often faces the same lack of information that the private sector faces. And Hayek might say something similar, that there is a knowledge problem. The government does not have enough information to set the right wage for each firm.

I have also never seen any minimum wage advocate say what wage would actually start to decrease the number of workers hired. Again, even in the monopsony model, this will happen if it were too high.

A minimum wage advocate could argue that it makes businesses more efficient and productive because it cuts down on worker turnover which reduces hiring and training costs. But why would businesses have to wait for the government to impose a minimum wage to do that? They can do that on their own. Now maybe the first time this happened, firms were presently surprised by the beneficial effect of the minimum wage. But now that this knowledge is out there, we don't have to keep raising the minimum wage to make this happen. And, as always, how would the government know how high to set the minimum wage so that its negative effects don't outweigh this positive effect? There is no guarantee that they do.

Finally, if the minimum wage law is used as an anti-poverty policy, then the burden of this policy is placed on those who have hired the poor workers. The businesses will have to pay and they may pass some of the cost along to the customers. So anyone who does not patronize, say, fast food restaurants, and does not own any stock in them, does have to pay for this anti-poverty program. It has to be paid for by those who were responsible for the poor having those jobs in the first place: the owners and customers. Is it fair to push this cost on them while everyone else pays nothing? Maybe expanding the Earned Income Tax Credit would be more equitable since it spreads the burden over everyone in society, not just a small minority.